CHAPTER 9: BUDGETING , RODUCTION , CASH AND M ASTER B UDGET
Budgeting, Planning and Control
Budgets are financial plans for the future, key component of planning as they identify
objectives needed to achieve them.
Strategic Plan identifies strategies for future activities and operations, covering five
years. Objectives are on the basis of the budget. Budget and strategic plan should be
tightly linked. Can translate overall strategy into long and short-term objectives.
Advantages of Budgeting
1. Forces managers to plan
2. Provides information that can be used to improve decision making
3. Provides a standard for performance evaluation
4. Improves communication and coordination
Control is achieved by comparing actual results with budgeted results on a periodic basis
Master Budget for a one-year period, fiscal year of the company. Broken down into
quarterly and monthly budgets. Smaller time periods allows a manager to compare actual
data with budgeted data more often.
Continuous Budget is a moving 12-month budget. Maintain that it forces
managers to plan ahead constantly
Directing and Coordinating master budget made during last 4 - 5 months of current
Budget Committee reviews budget, provides policy guidelines and budgetary
goals. President of the organization appoints members: Vice president for
marketing, vice president for manufacturing and the controller. Controller is the
Budget Director. Responsible for directing / coordinating budget process.
Major Components of the Master Budget
Operating Budget describes the income-generating activities of a firm (sales,
production and finished goods inventories)
Financial Budgets detail inflow and outflow of cash and financial position of
company. Appear in the cash budget. Expected financial position shown in Pro
Forma balance sheet.
Preparing Operating Budget
1 CHAPTER 9: BUDGETING , RODUCTION , CASH AND M ASTER B UDGET
1. Sale Budget describes expected sales in units and dollars.
a. Bottom up approach requires individual salespeople to submit sales
Sales = Units x Unit Selling Price
2. Production Budget tells how many units must be produced to meet sales needs
and ending inventory requirements
Units to be Produced = Expected Sales + Ending Inventory – Beginning Inventory
3. Direct Materials Purchases Budget tells the amount and cost of raw materials to
be purchased in each time period.
Purchases = Materials Needed + Desired Ending Inventory – Beginning Inventory
4. Direct Labor Budget shows the total direct labor hours and the direct labor cost
needed for the number of units in the production budget
Labor Cost = Units to be Produced x Time